Navigating “Buy American” Regulations: Taking the Complexity Out of ARRA
Despite what many people seem to think, “Buy American” is not new. It did not just appear along with the billions of Federal dollars injected into the economy over the past year to help stave off a global depression. The United States Government has long had a policy for preferring to buy goods and services from American companies rather than their foreign competitors.
Indeed, Buy American has been a regular part of contracting with the US government for decades, so why does it seem so complicated today? The simple answer is that the world has become a complicated place, and without being overly critical or facetious, there is nothing bureaucracy loves more than complexity. It’s the same everywhere on the planet and in this case it is making life hard for those people whose livelihoods are dependent on understanding the regulations and how they work.
According to Vince Ridgell, director of federal sales for Siemens Industry, Inc., really understanding the issue requires one to travel back in time to the origin of the requirements and the evolution of the global economy.
“It makes sense to most of us that the government would have a preference for the use of American goods in public buildings and public works,” he says. “However, the regulations and statutes handed down to implement the ‘preference’ can boggle the mind. Initially, it was generally accepted that manufactured goods should be of domestic origin, meaning manufactured in the United States substantially from domestic components. That sounds simple enough, but even then, the definitions of key terms like ‘manufactured’ and ‘substantial’ were open to broad interpretation at the agency and department levels.”
The issue was further complicated by the globalization of the marketplace and the explosion of technological and manufacturing process advances that saw the design/build/deliver process for each component in a single finished item split up across several countries. In the 70’s, provisions to implement trade agreements were introduced, and earlier this year rules were amended for Commercial Off The Shelf (COTS) items (waiving cost of components tests for many items). When properly understood and applied, these changes benefit buyers and sellers, but once again the regulations are so complex and difficult to navigate that manufacturers and suppliers may not be taking full advantage of the new provisions.
“If you are contracting with the Government today it is crucial that you understand the Buy American rules associated with your specific opportunity,” he says. “This can be very difficult for smaller companies that might not have the resources to research and interpret all of the provisions.”
ARRA Funded Projects
In February of this year Congress passed the American Recovery & Reinvestment Act of 2009 (ARRA). Included in the Act, under Section 1605, are special Buy American requirements for iron, steel and manufactured goods to be supplied for projects funded by ARRA.
In most cases ARRA dollars are flowing from federal entities to state and local governments, funding “shovel ready” projects like universities, water/wastewater and schools at the municipal level. Along with the money, these local governments also take on a requirement to adhere to policies that were put into place for federal buyers whether they were already equipped to manage such a policy or not.
This has had a series of unintended consequences, not the least of which include delayed projects and escalating costs and greatly complicated the lives of many people at the implementation level.
Rep. David Dreier (R-CA) detailed the issue in a guest blog entry at www.heritage.org. “While federal agencies are accustomed to and equipped to deal with the substantial bureaucratic red tape that comes along with complying with the Buy American Act, few states and no local governments have any experience with the administrative and legal implications of these complicated regulations. The resulting confusion and uncertainty have caused a number of state, county and municipal projects to grind to a halt. In many cases, project managers have had no choice but to shut down badly needed construction and infrastructure projects while the lawyers work out the mess. Even those projects that have resumed work have faced escalating costs.”
Adds Ridgell, “Our research has shown that when suppliers do not understand the Buy American regulations, they often unnecessarily disqualify their products from a procurement. And you can’t go to the customer for clarity because the project managers you are working with at the state and local governments may not themselves understand ARRA requirements. They didn’t write them and they aren’t equipped to manage them.
“Nevertheless, they are under tremendous pressure to expedite procurement activity, and get these funds out into the community where they can stimulate the economy. So suppliers and manufacturers who become knowledgeable about the regulations and apply them properly can really help alleviate some of that stress and prevent gridlock at the project level while simultaneously ensuring they can participate in ARRA funded projects to the maximum extent possible.”
Janet Pennington, Government Contracts Manager for Siemens Industry, Inc., closely follows the statutes and regulations associated with Buy American, and assists the company in implementing processes to expedite responses. Says Pennington, “Reading the language of the requirement is really just scratching the surface—one must drill down into the CFR (Code of Federal Regulations) and FAR (Federal Acquisition Regulations) to fully understand how to comply.”
For example, ARRA Section 1605 (codified at 2 CFR 176 Subpart B and the policy detailed at §176.70) requires that “all of the iron, steel and manufactured goods used in a project funded by ARRA monies be ‘produced or manufactured’ in the United States.” A very important distinction is made at §176.70 (a)(2)(ii), “There is no requirement with regard to the origin of components or subcomponents in manufactured goods used in the project, as long as the manufacturing occurs in the United States.”
The factor that matters most, says Pennington, is the point of “substantial transformation.” At what point in the manufacturing process did the item in question go from being a bunch of parts to the finished good? “Many OEM’s may be unnecessarily polling their suppliers for Country of Origin for components used in the manufacture of goods like control panels or other end products to be delivered to the construction site.”
To assist contractors and supplier in determining the point of substantial transformation, the Environmental Protection Agency (EPA) issued guidance in July of 2009 (amended September 2009) that uses a two part test. Moving through a series of questions, suppliers can arrive at “substantial transformation” either by achieving a “change in character or use” of a product, or through “complex and meaningful processes” determinations. The EPA offers four questions for “change in character or use” and a supplier must answer only one of these affirmatively to determine substantial transformation. “Complex and meaningful processes” is a more subjective determination and the EPA offers five questions, two of which must be answered “yes” to conclude substantial transformation has occurred.
Says Pennington, “OEMs should carefully consider whether the processes occurring at their facility result in a new manufactured good, or merely the modification of an existing product. This distinction may have a profound impact on how the part or product is viewed under ARRA.”
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